Gov. Mark Dayton wants to solve nearly half of Minnesota’s budget problem by taxing the rich, a strategy that he said keeps a campaign promise but Republican legislative leaders called a job killer.

Dayton proposed a $37 billion two-year budget Tuesday that would temporarily impose the highest state income tax rates in the nation on the wealthiest 5 percent of Minnesotans.

He would use the $2.9 billion generated by that tax increase to help plug a projected $6.2 billion gap in the budget, boost state spending on public schools and avoid cutting state aid to cities and counties.

“To the most successful Minnesota citizens, I please ask for your help in addressing this $6.2 billion shortfall,” the Democratic governor said at a press briefing. The state needs the extra money to “turn this ship of state around and restore the state to fiscal balance.”

He proposed raising the top income tax rates from 7.85 percent to 10.95 percent on married couples with taxable incomes of more than $150,000 and head-of-household filers with taxable incomes of more than $130,000, and single filers with taxable incomes exceeding $85,000. That would raise an estimated $1.9 billion over two years.

On top of that increase, he called for a three-year, 3 percent income surtax on those earning more than $500,000 a year in taxable income. That would raise an estimated $918 million.

He stressed that 95 percent of Minnesotans would see no tax increase under his budget plan.

However, no Minnesotans will see any tax increase if the Republicans who control the Legislature get their way.

The largest tax increase ever proposed by a Minnesota governor would result, with the surcharge included, in the highest state income tax rate in the nation, 13.95 percent, said Senate Majority Leader Amy Koch, R-Buffalo. The current highest state tax rate is 11 percent in Hawaii and Oregon.

That soaring rate would encourage Minnesota business owners to leave and discourage out-of-state entrepreneurs from investing here, said House Speaker Kurt Zellers, R-Maple Grove.

“We’re not going to let Mark Dayton tax jobs out of Minnesota,” he said.

The governor said only 9 percent of Minnesota businesses would pay higher taxes under his plan.

Meanwhile, taxpayers at the low end of the new tax bracket would pay $139 a year more in state income taxes, while millionaires would pay $37,000 more, said Assistant Revenue Commissioner Matt Massman.

On top of the income tax hike, Dayton proposed a state property tax on homes valued at more than $1 million and eliminating a tax “loophole” that allows snowbirds who live outside Minnesota for six months and one day per year to avoid paying state income taxes.

Massman noted that the wealthiest 5 percent of Minnesotans pay 9.5 percent of their income in state and local taxes, while the bottom 90 percent of income earners pay 12.3 percent.

While praising the governor’s tax principles, even the House and Senate DFL leaders, Rep. Paul Thissen and Sen. Tom Bakk, stopped short of endorsing his tax increases.

Tom Hanson, management and budget commissioner under GOP Gov. Tim Pawlenty, was struck by the contrast between Dayton’s first budget proposal and the four budgets proposed by his old boss.

“It’s like gubernatorial budget whiplash,” said Hanson, now a lobbyist. “In a short time, we went from a guy with no new taxes to a guy with all new taxes.”

Dayton proposed increasing general fund spending by 7.5 percent over the next two years. (Republicans argued the increase is actually 22 percent, but they didn’t include the $2.3 billion in federal stimulus money and $1.9 billion in delayed school payments that Pawlenty and the last Legislature used to balance the budget.) Overall, the state will spend $64 billion, including federal funds and tax revenues dedicated to specific purposes, such as roads and bridges.

The governor also “saved” $1.5 billion by delaying repayment of promised state aid to schools until 2014.

He would inflict some pain to balance the budget, calling for about $1 billion in spending cuts — about one-sixth of the fiscal solution.

But Dayton warned that if Republicans reject his plan, they must inflict more pain.

“The reality is for every dollar of revenue you don’t raise, you have to cut a dollar of support,” he said.

Dayton’s cuts include a net $383 million reduction in health and human service programs. He would protect the lowest income recipients but would end state-subsidized MinnesotaCare insurance coverage for 7,200 adults with incomes above 200 percent of poverty — about $44,000 for a family of four.

He also would increase surcharges on health care providers and trim state payments to nursing homes and agencies that provide home services to the elderly and those with disabilities.

Those cuts are needed to rein in rising health care costs, he said. But health and human services would still be the fastest-growing part of the budget, accounting for 32 percent of spending in the next two years, up from 30 percent during the current biennium.

He kept his promise to increase funding for K-12 schools, albeit by less than 1 percent. He requested more money to fund all-day kindergarten and programs to close the achievement gap between students of color and their white classmates.

The University of Minnesota and Minnesota State Colleges and Universities system would each take a 6 percent funding cut, but his plan maintains state support for grants to low- and middle-income students.

Cities, counties and townships would escape state aid cuts. Dayton said he hoped to prevent property tax increases, which have risen more than 70 percent in eight years as local government aid was cut.

St. Paul Mayor Chris Coleman said the governor recognized the critical role state aid plays in funding police, firefighters and librarians who keep the city’s residents safe and help educate children.

However, the state work force would be cut by 6 percent. Management and Budget Commissioner Jim Schowalter said 800 state workers would lose their jobs, some through resignations and retirement but others through layoffs.

Dayton would maintain current levels of funding for the state courts and prisons and provide slight increases for the National Guard and veterans services. Other agencies face up to 10 percent budget reductions.

The governor will pitch his budget Wednesday in stops in Duluth, Moorhead, Mankato and Rochester.

Republican legislative leaders will respond to the DFL governor with news conferences in the same four cities.

Bill Salisbury has been a newspaper reporter since 1971. He started covering the Minnesota Capitol for the Rochester Post-Bulletin in 1975, joined the Pioneer Press as a general assignment reporter in 1977 and was assigned to the Capitol bureau in 1978. He was the paper's Washington correspondent from 1994 through 1999, when he returned to the Capitol bureau. Although he retired in January 2015, he continues to work at the Capitol part time.

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